Discount Rates Matter
January 25, 2012 - Sellers of structured settlement payment rights in the secondary market quickly learn two things: 1) there is no shortage of companies offering ‘cash now’, and; 2) future payments are worth less today than if held until the annuity payment due date. While the point of this post is not to address ‘cash now’, it is important to note that the only way an individual can legally sell their structured settlement payments rights for a lump sum — and the only way a third-party can buy them from you — is by following a specific federal law and associated state-specific transfer statue: Settlement Payment Laws by State . The real point of this post is to discuss the importance of the discount rate to sellers of annuity payment rights.
A dollar today is worth a dollar, but as in all things the passage of time is unkind, and a dollar due in five or ten years is worth less than a dollar today. As a result, companies purchasing structured settlement payments do so by offering a discounted present value, which is calculated by applying a discount rate. Discount rates are the exact opposite of interest earned on a savings account, bond, or certificate of deposit. The higher the rate of interest the more the investment will yield in the future, whereas the higher the discount rate the lower the value for your structured settlement payments today. In this calculation one or two percentage points can mean thousands of dollars to you.
The transfer statutes of several states require the disclosure of the discount rates in the Disclosure Statement. Sellers of structured settlement payment rights should not be afraid to ask: What is the discount rate? How did you arrive at that rate? Ultimately, approval of your transaction and receipt of a lump sum in lieu of waiting for the receipt of the payments from the insurance company hinges on a judge determining that it is in your best interest to sell your annuity payment rights. The discount rate will be an important factor in the judge’s decision. Too high a rate may jeopardize approval. Disapproval means you have wasted as much as two months or more to get in front of the judge only to have a denial issued, returning you straight to square one.
Ultimately, it is not in your best interest to sell your future annuity payments at an above market discount rate. The reality is that there are currently very few places where investors can turn for a safe fixed rate of return. Your structured settlement payments have a value today that is more than their value two years or six months ago. In addition, every day that passes between today and the due date of your payments increases their value. Remember, a dollar today is worth a dollar; a dollar next week, slightly less; a dollar in fifty years just a few pennies.
The discount rate drives value. Sellers of structured settlement payment rights who ignore the rate and do not seek offers from different sources do so at their own peril and may ultimately end up with a judge denying the sale. Do not simply fall for ‘cash now’…stand for a better value and a better rate.
